For a media company which is balance-sheet insolvent to the tune of €200m, which reported a comprehensive loss of €177m for the first six months of 2012, which has seen circulation and advertising decline 5-10% in a year and which owes the banks over €400m, you’d have to wonder if the folks at Independent News and Media know anything about the media business, let alone the property business. Today, as we enter into the second of the main activity periods on the property calendar, ignorance doesn’t act as an obstacle as there is an all-out onslaught on our sensibilities with the message memorably given by former Minister for Finance Brian Lenihan in April (2010) – “you can buy now in confidence that the price is realistic”, a comment not uncoincidentally carried back then in the Sindo also.
The “buy now” message was last given by the Sindo on 8th January this year, since which time, property has fallen nationally by 5.8%, by 5.1% in Dublin and 6.7% outside Dublin, according to the CSO. Dublin apartments have declined by 13.4% so far this year. So if you had bought a typical €200,000 apartment in Dublin at the start of the year, perhaps acting on the advice and reporting of the Sindo, you would now be nursing a €26,800 loss (so far, this year)
Today, we have a feature piece from Jerome Reilly on the residential property market which carries extensive quotes from hardly the most reliable of property market commentator – the embattled estate agent – who is still hyping the €400-800,000 house market in south Dublin. Claims are shot out at the rate of a “spray and pray” Uzi, all suggesting a great hive of activity and stable or rising prices. One agent – it really could have been any of them – ambitiously claims “the good thing is that people have realised the bottom has been achieved and they are not going to save another 10 per cent by waiting until next year” On days like this, it is a pity we don’t still have stocks in town squares where we might vent our feelings towards certain estate agents with rotten vegetables and faeces, and not throw them on poor Deputy Peter Mathews’s driveway in Mount Merrion as reported elsewhere today.
The Sindo uses figures on the volume of stamp duty returns in a separate battle-front today, to claim a rise in stamp duty and consequently that the “property market is beginning to pick up”. And “pick up” in the Sindo’s parlance means price rises. The Sindo uses real numbers which show 33,000 stamp duty transactions in the first six months of 2012 compared with 27,000 in 2010. So how are they wrong? Take a look at the actual stamp duty returns for 2002-2011 revealed in figures provided to the Fianna Fail finance spokesperson Michael McGrath just before the Dail summer recess (extract in the table below). The volume of transactions did indeed increase by 15% between 2010 and 2011, the last year for which annual data is available but look at the VALUE . The value fell by more than 50% from €107m to just €50m. So increased stamp duty transactions – which remember, could be a transfer from a husband to a wife or other off-market transaction – don’t in themselves mean prices are “picking up” – in fact the direct opposite appears true.
And finally, we have a puff piece on the health of Ireland’s commercial market – which has declined by 4% in the first six months of 2012 with rents still declining, and where transaction levels by value are below the dire levels of 2011; all this despite the free-for-all in last year’s Budget 2012 where stamp duty was reduced from 6% to 2% and major incentives were provided for the purchase of commercial property and of course property owners were given certainty that this Government would not tinker with Upward Only Rent Review leases. Despite all this, transaction volume is up marginally but VALUE is down on 2012. There is still a dreadful bread-and-butter oversupply of commercial property across the country, and particularly in Dublin. Yes, we might need a couple of new 100,000 sq ft offices in exceptional cases, but most demand is catered for by a supply which presently has 15-25% vacancy levels.
Ratings agency Moody’s reckons property nationally has 20% further to fall, something disputed by estate agents who, let’s face it, depend on confidence for transactions to take place, and without transactions there isn’t commission or income. That doesn’t mean all estate agents are deceitful scammers trying to lure you into buying a falling knife, agents throughout the country are doing their business, trying to get sellers to set their prices realistically and present properties as best they can to buyers, it’s an honourable business, you just need to be cautious about opinions coming from people whose livelihoods depend on you accepting there is stability or recovery in the market. This is what I believe to be a comprehensive list of forecasts/projections/stabs-in-the-dark for the Irish residential property market nationally.
It would be condescending to suggest to IN&M that it focus on the media business where it is notching up losses that exceed all its Irish competitors combined, but cynics might point out there is a relationship between the media business and the property business and a booming property market in the past has led to super-normal profits in the media business.
NAMA Wine Lake 
Of course estate agents are unreliable witnesses, but I can’t see that citing Moody’s does much to make the case against them.
@Kevin, it is not immediately obvious what stake Moody’s has one way or the other in Irish property, so some might say they are amongst the most independent. But point taken which is why the comprehensive list of predictions is included above, and if you feel any is missing, please let me know.
Additionally, from the Dept of Finance figures, stamp duty has fallen from 508m in the period Jan-Aug 2011 to 395m from Jan to Aug 2012. A fall of 22%
See here:
Click to access analtaxaug2012.pdf
33,000 stamp duty transactions at 2%, bringing in €50 million in total, means an average property price of around €75,000.
Unless most of these outhouses or bet-sits or something, I suspect that the Sindo’s One Trick Property Pony is wrong once again.
I also happened to come across that same residential “uptake” piece in the Indo today and was fairly disgusted as there are people out there who will be basing their future purchasing decisions on what this newspaper says. The piece was not at all balanced and reflected a very poor level of journalism – it read exactly like an estate agent advertisement; not unlike other pieces from before the bust. Hopefully that same pre-bust tone is met with outright reader skepticism.
Yes, one cannot but wonder if vested interests were behind it – either that or outright stupidity.
Just noting that in 2010, FTBs paid no stamp duty… [from PropertyPin]
Mostly because there weren’t any of them!
No. Because FTB’s weren’t liable for stamp duty in 2010. They were in 2011 via changes in the budget.
Can’t see how you can achieve any ‘floor’ whilst the DoE control ‘zoned’ land via RPGs, most county councils are obliged to de-zone between 60/80% of their currently zoned land in order to comply (well not officially de-zone it but zone it as phased land that cannot be built on until the zoned stock is used up, i.e. it’s Agri land until the next bubble). No one knows the value of current zoned land because it may be De-facto Agri land before long, who would buy in such an environment, i.e no floor. The voluminous county and city councils planning depts are an expensive waste of time as power rest with the RPGs.
Thx FF and the green Enviry minister.
Having said that it’s not as if any council/planners zoning history are beyond reproach, same old pendulum swing as opposed to steady state in this country.
Given the sheer number and frequency of such articles, someone in power in the Indo must be in really serious negative equity. Although RTE can be as bad just not as frequent of late. They hype up the slightest percieved house price increase (headline news) but appear to minimise any negative data.
The Indo had another article today about how a couple were refused a 92% loan by AIB on €400k odd property purchase. Not a mention, of course that if the current trend in price drops continues at about 1% per month, the will be in negative equity around next May. Bank of Ireland gave them a loan. Well at least there is some cop-on in AIB, however late.
I have no doubt if the banks were to throw out 100% mortgages, a sizeable contingent of our population would, in effect, restart the madness with no thought of how to actually repay the debt. In a way it is just as well the banks are bust.
It was good to see so many online comments with the article disagreeing with their stance but I have no doubt that there will be a further batch of the same rehashed bull before the replay of the hurling final.
And that’s why debt forgiveness will not work. We have to use bankruptcy instead. Having a sizeable proportion of the population losing their house, and spending 2-3 years as wards of a court will put the dampers on property in this country for three generations.
The only problem now is that this has dragged out for so long that if you attempted to actually resolve the situation in this way, you would face a revolution among enraged middle class home-owners, lead by a cadre of the now bankruptcy property ascendancy, not a few of whom are behind articles like this one.
In a sense, these articles are a threat display from this cadre to the government. The message is: “We are still here. We control the newspapers. We are not letting go of our properties and profits.” Not that you’d need very much to scare off this government.
“We have to use bankruptcy instead. Having a sizeable proportion of the population losing their house, and spending 2-3 years as wards of a court will put the dampers on property in this country for three generations”
What you mean “we” white man,you and Joe Higgins?
Eh where would these people live,Spike Island or debtors prisions,at what cost,who would pay ALL the associated maintenance and security costs of this now vacant housing stock.
There was also a very poignant article in today’s Sindo,about a gentleman who committed suicide,by all accounts a great father and person,who was under pressure from creditors.All the best to the family.
You don’t put bankrupt people in prison. You control their assets and money for a few years. As to where they would live, well, there are hundreds of thousands of vacant homes and properties all over the country, so they can live there.
No it won’t be pretty, but it will be over in 2-3 years (or at least it would be if we had the right legislation)
Say I own a summer home in Galway,its ‘vacant’should people in arrears just like move into it,or if they get evicted just squat in it,sure it’s vacant !
There also appears to be a little bit of a waiting list with local authorities,should they CPO ‘vacant properties’ evict families from their own homes and rehouse then,for a Maths freak are you sure how the sums work here?
An alternative approach is pass modern BK legislation.provide a “homestead” exemption say 500,000 and let people get on with their lives.
Great article NWL. Best analysis of how the supposedly independent media are owned by the property ponzi scheme gangsters.
We will no doubt see more of this rubbish from RTE, TV3 and da print media .
Nothing has changed, the house ponzi scheme is just too good for the farmers, lawyers, auctioneers, engineers, suppliers, builders and media to die.
It needs gullible new house buyers to keep going.
We need to start exporting not building houses for ourselves.
@OMF, Punishment is defined as follows:
The infliction or imposition of a penalty as retribution for an offense.
Synonyms:
penalty – castigation – retribution – chastisement – pain.
Why do you feel that it is necessary to inflict punishment on someone who has just lost all his/her assets? Where does this type of thinking come from? Is it from the Irish psyche that believed that corporal punishment inflicted by the Christian Brothers and other teachers in our schools was the best method of teaching our children? Or is it a throwback to the time when we thought that capital punishment worked great because every killer we killed never kills again? Shame about the innocent ones. Why should we punish the children and the debtor’s family, because he failed?
With that sort of thinking we will never breed entrepreneurs – we will end up permanently with the system that we now have. A public service economy run for the benefit of public servants. Every day we get more and more like Northern Ireland – a dependent State. They are dependent on the Westminster Parliament and the UK, we are dependent on the ECB and Germany.
Ever since Eve started it all by offering Adam the apple, blame and punishment seem to be part of our genes. Someday we’ll grow up. Inflicting punishment on people who are already suffering the loss of everything they have, in itself is evil.
It is this sort of thinking that justifies AIDS as God’s punishment for homosexuals.
@WSTT : You’re in moral hazard territory. My own view is that all creditors who default on their repayments should be held accountable for their inability to repay what they owe.
Throughout this crisis we have had very little accountability at all levels in relation to creditors defaulting upon what they owe.
It’s my view that a large part of the financial/economic crisis in this country is as a result of creditors thinking that they’re entitled to some sort of dispensation for the inability to repay what they owe.
Perhaps if we had more accountability the option to walk away from paying what is owed would be the path less taken?
@GD, So we should do away with insurance because it presents a moral hazard?
How can you hold someone accountable for their inability to pay? Imprison them? If they have lost everything and are financially destroyed, I believe that Christian thinking is that they should be shown clemency.
In fact the thinking pre-dates Christianity:
“Deuteronomy 15:2 This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the LORD’s time for canceling debts has been proclaimed.”
Many individuals experiencing debt problems have deep moral or religious concerns regarding filing for bankruptcy. Consolation may be found in understanding a good deal of our modern bankruptcy laws evolved directly from the teachings of the bible.
The “seven year rule” respecting the discharge of debts stems from the “Lord’s Release” in the bible. In Deuteronomy 15.2 above, it was mandated that debts be forgiven every seven years, regardless of a person’s circumstances.
Deuteronomy 15: 1-3 (“At the end of every seven years you shall grant a release. And this is the manner of the release: every creditor shall release what he has lent to his neighbor or his brother, because the Lord’s release has been proclaimed”.).
The US Congress codified this biblical provision in the Bankruptcy Act of 1938 whereupon an individual could receive a discharge under Chapter 7 bankruptcy once every seven years. It has been changed twice since and is now eight years. Congress actually chose the number “7” to assign to “Chapter 7” of the Bankruptcy Code out of respect for the biblical precepts.
The seven year rule is again proclaimed in Exodus 21:2. The Old Testament also made provisions for debt forgiveness as the year of Jubilee wherein debts were to be forgiven every 50 years. Leviticus 25:10-13.
The New Testament reinforces the principles of debt forgiveness. The Lord’s Prayer as taught by Matthew provides that we seek to “Forgive our debts, as we forgive our debtors.” (We changed that to sins – must be our concept of “debt” as a “sin”) Matthew, 6:12.
The importance of debt forgiveness is reinforced in Mathew 18: 21-35. Jesus promoted debt forgiveness when he punished the “money changers” (lenders) by removing them from God’s temple. John 2:14-21. Jesus also said that for those who lend and expect nothing in return, their “reward shall be great.” Luke, 6:34-35.
Finally, the Bible is replete with provisions showing compassion for debtors and admonishing heavy handed tactics from creditors. Deuteronomy, 15:7-10 (If a man is poor, do not be hardhearted or tightfisted toward him.).
In some form or another, all major religions, including Christianity, Judaism, Hinduism and Islam prohibit usury by lenders while promoting compassion for debtors.
But foremost and above all else, all religions value family preservation far more than repayment of debts.
Moral hazard?
What about the business that repays all it’s debts?
What about the person who repays the loans he obtained?
“If they have lost everything and are financially destroyed, I believe that Christian thinking is that they should be shown clemency”
If media reports are to be believed many of the prominent property developers are still living the high life and haven’t lost everything.
The banks that defaulted upon their debts are still in business. What have they lost?
A system that rewards failure is a house divided against itself. IIRC Matthew Chapter 12 discusses this.
“Eh where would these people live,Spike Island or debtors prisions,at what cost,who would pay ALL the associated maintenance and security costs of this now vacant housing stock.”
Eh, maybe they could endure the shame and live in rented accommodation and if all the vacant properties (not including a privately owned holiday home that is not in mortgage default of course) are released onto the market, rent would be at a much lower level.
Its is a typical false argument that once repossessed property will be vacant. If you can’t repay the mortgage on your house and it is repossessed, I am quite prepared to buy it if suitable as regards location and price.
If I buy a Roll Royce on HP for €300k, essential for getting the kids to school dontcha know, and I default on payments after 12 months, would I still have possession of it 3 years later and society accept my pleas that if you repossess, it will only rust into the ground, cost of security etc. Of course not and the same principle applies to houses. If you cant afford it you cant kept it.
Whats the current Irish version – you buy a house on finance and default on repayments for whatever reason other taxpayers have to keep you in the house no matter what it cost forever after. Its this kind of stupidity that has us broke as a nation. Irish solutions to Irish problems do not work.
If society wants lenient bankruptcy or debt enforcement laws and I am no advocate the current 12 year period, then borrowers must accept that banks will require higher equity investment and high interest rates to make their business model work. That does not bode well for business and home buyers alike.
Its still not too late to introduce a minimum 15% equity contribution and a maximum 3 times loan to earnings ratio requirement for house purchase but I wont hold my breath.
Those who see themselves as the elite in the country are in a really deep hole as a result of the property market fiasco. They will not let go of their assets or power easily even if it bankrupts the nation for 50 years.
Keep up the fantastic work NWL
@OMF
What sort of planet are you living on? I’ve seen the same sort of suggestions that you’ve raised here bandied about for a while now and with every passing day they are looking more and more deluded.
What your proposing is a akin to the Pakistan Indian divide with thousands of familes traversing the country in search of vacant dwellings to satisfy the whim of politicians who have devised a crazy personal bankruptcy regime to solve a structural debt disaster. When imaginative solutions were required for this issue let me assure you your most recent offering is a hark back to the stone age and not the way forward.
Lets get this clear. We have a structural mortgage debt disaster. At the moment at record low interest rates c22% of those owning a house by way of a mortgage can’t afford to pay for it. This figure goes well beyond 30% when rates start to rise. The 30% figures tells us absolutley nothing about the remaining 70% – what we do know is that many who bought between 2001 and 2007 are most likely in difficulty and this is before property taxes, budgets 2013, 2014 and 2015 where another c€10bn will have to be found most likely in a rising interest rate and commodity background. In addition the assumption being that the CPA remains in place up until 2014 – this is highly unlikely to be the case – and after 2014 PS salaries will likely be hammered on the CPAs renegotiation.
Can we as a country please wake up to the fact that this debt disaster is going to get significantly worse and therefore personal schemes which aim to hammer individuals on the back of banks mispricing of property for a decade won’t work. The PIB is dead on arrival. Personal insolvency schemes the world over were devsied as ways forward for individual hard cases i.e. one off cases. They are not the method for solving situations such as that within PTSB where 80% of all 2005 to 2008 owner occupied mortgages are now in arrears. That’s not a misprint. The number is 80%. Even the most fervent supporters of personal bankruptcy schemes simply have to acknowledge that numbers of this magnitude point to something deeper at work than individual hard cases which suggest that talk of such solutions are the wrong policy choice.
In case you don’t buy my line of reasoning here’s another, much more accomplished than mine.
http://trueeconomics.blogspot.ie/2012/09/792012-psychological-effects-of-debt.html
It would seem that once again a false bottom is being predicted by the vested interests.As NWL quite rightly points out it is not in the interests of the media,property agents,legal profession or even polititians to have low property prices as many in this area earn a living from charging a PERCENTAGE of the selling price instead of a fixed fee.The only persons to benefit from low prices are the beleagured couples who simply want a roof over their heads at reasonable cost.I once again give the historical figures on house prices from 1959 to 2007.
In 1959 the National 3 bed s/d house price was €1,500.The Annual National Average Industrial Wage was €600.You could purchase the above house for just 2 and a half times the Annual Average Industrial wage.In 1973 the same house cost €10,000 and the Average Industrial Wage was €4,000.Again you could purchase the above house for 2 and a half times the Average Industrial Wage.In 1996 the same house cost €60,000 and the average industrial wage was €20,000.You could purchase the house again for 2 and a half times the Annual Average Industrial wage.In 2007 the same 3 bed s/d cost €313,000 and the Average Industrial Wage was €37,500 NOW IT WOULD TAKE 8.35 TIMES THE NATIONAL AVERAGE WAGE TO PURCHASE IT. So from 1996 to 2007 the national average industrial wage increased by around 100% but house prices increased by about 400%.Clearly Prices MUST fall back to the 1996 ratios before they bottom out.A drop of some 49% on the current National Average house price of €156k.
I believe also that taking into consideration budgets to come where over €13 billion is to be taken out of the economy over the next 4 years or so,there will be further reductions in property prices of the order of 20 – 30 % as predicted by both Moodys and Morgan Kelly
@SPO, just to be clear about the position on here, it is in the interests of both the economy and society that we have stable house prices increasing moderately. Not just for the banks or media which might yearn for a return to the days of bumper property advertising, but for homeowners (most households in Ireland) and indeed for those contemplating the purchase of a home. Stability and gentle increases will boost confidence, spending and the domestic economy, and not just the fortunes of estate agents, newspapers and banks.
The caveat to the above position is that we see stability in *competitively priced* housing and whilst we have a 80-100,000 overhang, a dysfunctional banking sector, a mortgage crisis that elsewhere would be resolved with repossessions or debt write-down, an 8-9% deficit which needs be closed with money being extracted from the economy, we don’t yet have a housing market with stable supply and demand. That is not to say that housing is not undervalued by 26% by reference to long term affordability measures or that housing shouldn’t be 50% of prices today or 200% of price levels today, it just means we have huge distortions which will need be worked through before we can declare a competitive market.
NWL I agree largely with your sentiments but surely to achieve this we must return to the days of prudent lending e.g. a deposit of 25% mandatory, loans not to exceed 2.5 to 3 times annual wages of ONE EARNER only.In this way it might be possible to indirectly control the price of property and prevent it from taking off as previous.With 2 persons income being taken into account and some banks lending 100% mortgages(and extra for a car!!) its no wonder that house prices shot up to meet the availability of funding(otherwise known as greed)As some other blogger mentioned previously if there are no proper enforcible controls on lending we could see a return to the recklessness that prevailed from 1996 to 2007.
@ seniorpropertyobserver
I think any calculation of what house prices should be on the basis of a multiple of the average industrial wage no longer makes any sense. There’s very little ‘industry’ in Ireland and average wages don’t allow for levels of wealth held in Ireland in a globalised and open economy. Such wealth may come from land ownership, share ownership, international investments, or other foreign income.
On the other hand, I think your suggestion of prudent lending with, I suggest, a minimum 30% deposit and the disposable income of the purchasers (single or couple) rigorously stress tested for the impact of tax increases, interest rate changes, ability to pay bills, etc., before loans are approved, would work much better. I have no idea what house prices would result from such lending but I think it would be irrelevant at that point what multiple prices then are of the ‘average industrial wage’. All we would be certain of is that the house prices would be affordable.
@seniorpropertyobserver
your analysis of prices vis-a-vis average wages completely ignores interest rates, per the central bank indicative building society mortgage rates averaged 12% from 1975 to 1990 before they started to fall steadily. this kept property prices nice and low pre 1990 but didn’t necessarily lead to a good standard of living. on a sample 25 year mortgage of €100k @ 6% the monthly repayment is circa €650, at 12% this rises to to circa €1050 a month. low prices doesn’t necessarily translate into ability to repay. unless of course you want rich cash buyers to benefit
B and PU.I agree that interest rates were high in years gone by I myself paid almost 17% interest on a loan in the late 60’s and 70’s.However do you not agree that something went terribly askew from about 1996 to 2007 when from what I can make out average wages increased by about 100% but property prices increased by about 400%.This clearly was’nt justified and it is my view though you may disagree, that average property prices must fall to 2.5 to 3 times average annual wages before the bottom is reached.I would like to hear your views and opinion on what you consider the bottom should be,as I do not believe it should be based on the amount of finance a person or couple can raise.In other words the more that can be raised the dearer the property should be?
@property utopia/seniorpropertyobserver
First off Morgan Kelly wrote a technical piece a couple of years back where he concluded that the influence of interest rates on house prices were significantly below what one would expect so suggesting above that an analysis which fails to include the effect of interest rates is flawed, doesn’t in fact wash. In relation to property matters I believe Morgan Kelly.
In addition the notion that house prices should mean revert to 2.5 times the average industrial wage is equally as flawed. House prices were priced to these levels because thats the levels banks lent to i.e. banks really determine the price of houses (not their fundamental value mind) not the interaction of consumers in the marketplace. Property in normal times is a leverage driven market, not cash driven, unlike virtually no other asset market hence the need to understand the influence of banks lending practices on ‘market’ prices.
So folks your both wrong. Property and its fundamental value should only be determined by its ability to generate a rent. Rent, rent and only rent. Nothing more or nothing less.
The rental income and its long run stability/visability can be determined by the supply and demand dynamics in the marketplace using demographics/family formations/inflation rates/employment etc etc. These are the long run drivers of housing demand and rental income. In balanced markets if supply is sufficient to cater for such demand then over the long run the average multiple to current rent paid in the marketplace for houses since the early seventies in Ireland amounts to about 14 times i.e. a rental yield just above 7%.
The 7% number has serious form, in that it can also be verified by using a top down approach when viewing property as a risky asset investment perspective versus long run Govt bonds. I’ve noted here before that Credit Suisse complete a very useful yearly review of long run asset market returns for individual country asset markets using data accumulated over the past 150 years. In that period as far as can be determined Irish risky asset returns have displayed a premium of about 3.5% above long run 10 year Govt bonds which average about 3% nominal over that period – in other words risky asset investments in the RoI have paid c6.5% over the long run. Property would be considered a risky asset investment and given its lack of liquidity relative to pure equity plays suggests it should trade at a small premium above 6.5% – and what do you know – it does. So I’m very happy that a 7% yield over the long run is where property markets will eventaully mean revert to. That is not to say that yields will go beyond that level given the significant over supply of housing which have at the moment but over time with virtually zero building over the past 4 years this supply will be drawn down and balance will be restored and yields will revert to 7% for the market as a whole.
Now folks banks know this stuff. It’s not complicated. The question is therefore why a lending bank would go out of its way to fight 150 years of market pricing over good, bad and indifferent times. One would have thought they should know better. Sadly not so. Over the long run rent has also exhibited a tendency to align itself close to CPI. In fact it generally hugs a annual growth rate of +/- 1% on CPI. In the period 2001 to 2007 rents did exactly this and yet prices went to the moon – the reason being is that the method used by banks to price houses is not a fundamental approach as noted above. Banks priced houses on ones ability to pay a loan. Paying a loan has nothing to do with the earning power of the asset its supposed to be financing, they are not the same thing.
In pricing houses this way banks in the 2001 to 2007 period moved away from the earning capacity of the asset to the earnings capacity of the individual and hence the almightly screw up in lending practices. This is a banking error, not a consumer issue as banks always have the ability to say no to any loan request. Banks as we know didn’t say no, because house prices only ever go up, right? Eh no – as indicated above they can go down for a host of reasons but the pricing method used by banks in the period in question worked to an entirely different asset ‘valuation’ methodolgy and required that prices only ever go up and when they stop going up in ‘value’ (the fundamentals return to earth) the music stops and the banks go bust…. qed.
GHD Very well laid out no doubt but you still hav’nt predicted where you see the bottom and at what relative rate to income you might calculate.So using your figures as a guide that a property could possibly be valued at 14 times the annual rental it is reckoned that the AVERAGE rental for a 3 bed semi in Ireland is somewhere between €500 and €600 pm. If we multiply this by 14 we get a house price of between €70,000 and €84,000.NOT the €156K approx it is at present.If prices eventually reach this level they will be approaching Morgan Kelly’s prediction and indeed my own of 2.5 times the average wage.So now!
Sorry Y or B slight error there it should be €84K to €100K but its still in the region.
@spo
As indicated above the relationship to income is a spurious one at the best of times and simply cannot be considered a fundamental driver in the price of a house in the same way my salary is completly unrelated to the price that CRH or Ryanair shares trade in the market. They trade at the prices they do based on a multiple times their expected forward earnings. A house is no different it should trade based on its ability to earn a rent whether this value is 4 times or 1.5 times the current average industrial wage is a matter of indifference. As indicated above your method is no better than the banks and their all bust as a result. Trying to tie in someones ability to earn enough money to repay a loan and equate that with house prices is comparing apples with oranges. They are unrelated – it may prove interesting to observe that over time average house prices mean revert to the number that you suggest but I’d suggest its ultimately a proportion of average rental costs to average incomes which is whats driving the relationship.
In terms of peak to trough house prices I’ve suggested here before that based on current rents and with over supply the way that it is in parts of the county the average fall for the market as a whole will ultimately be in the region of c75% observed as follows:
Market “asking” yields per Daft.ie in July 2007 (market peak) was 3.12%
Adjustment to bring asking yields to actual contracted rent agreements is 7% discount of asking prices i.e. 0.93 of asking yields( per Ronan Lyons workings)
Contracted gross yields at peak of market was therefore 2.90% (a truly unbelievable number !)
Adjustment of c25% to nominal rents has been observed since markt peak to most recent survey i.e. 2.9% *0.75 = 2.18%
Additional 5% drop in rents now expected taking into account additional property taxes, charges and reduced rent allowances i.e. 2.18% *.95 = 2.1%
Gross Yields for market with significant over supply in many parts of the country will see yields move beyond the long run average of 7% – most recent Allsops results and elswhere is suggesting a 9% running yield based on most recent cash and mortgage transactions in the market place. (Note the CSO data is not picking up cash transactions)
Minimum peak to trough market average fall now expected to equate 9% to peak based yields of 2.1% is a fall of c76% i.e. (9%- 2.1%)/9%
I have absolutely no doubt we will see these numbers – talk of market bottoms is complete nonsense. The only result that will determine a bottom in the market is when the quarterly Daft RENT survey records an average market yield at 7% or bigger – at that point one could feel relatively confidient that prices are approaching or near the bottom. All other observations are next to useless.
Y or B However you get there we seem to hold the same view – property to fall to near 80% of peak and I would say you are about right at 75%.Therefore if we take the peak of €313K as the price of an average 3 bed semi. a 75% overall drop will leave prices at €78K approx.About 2.5 times the average pay.
As it was from 1959 to 1996 or so.
I don’t believe anyone buying a house as his or her principal primary residence considers yields at all. This concept of yields is regularly bandied about by economists and finance professionals but, in my opinion, it is meaningless. Nevertheless, I suppose it is a harmless activity for people to crunch numbers and try to work out what house prices should be on the basis of rental yields.
No matter what economists say, buying a home cannot be considered similar to buying an asset. A home purchase is a huge psychological decision encompassing all sorts of factors. When I bought my first home I certainly wasn’t cognisant of rental yields. All I thought of was personal affordability. That is, could I furnish/redecorate the house and pay the mortgage without having to live on bread and water. Tell me I have a peasant mentality but I wanted to own my own place.
People also buy second homes as a store of wealth. The stereotype of the well-off person buying an apartment or house in Dublin so that his children will have a place to stay when they go to College is actually quite real. I have an in-law who is subsidising the mortgage on an apartment in Dublin (rent below monthly repayment) as she considers this a form of long-term investment in her young son’s education. Call her insane if you wish but it makes complete sense to her. I am certain there are many people just like her. I live outside Dublin and many work colleagues say that it costs a minimum of €10k a year to keep a son or daughter in College in Dublin (registration fees, books, laptop, weekly rent and food, transport, spending money). I regularly hear them say they wish they’d bought a property in Dublin years ago.
@Bunbury
That’s exactly why the country is broke. The banks failed and still fail to understand the rationale for house valuations – until a rental approach is adopted the liklihood of a similar boom bust scenario developing is very high.
Sadly buying a home can and should only be considered as an asset purchase decision – when emotions get in the way of investment decisions mistakes are made. Sorry to be so cold about it but the banks will treat those in default in an equally cold manner. Best be prepared.
yob – there are a list of western countries as long as your arm where your 7% yield is not in place for owner occupied residential properties and while you might like this to be the way the average family value a home it isn’t. i’d love world peace but you can’t everything you want
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